At a glance
- Is my rental property affected?
- How is the amount of non-deductible expenses calculated?
- What is the impact on my personal income tax if the expenses are denied?
- How do I determine if the property rental is compliant?
- What if the property is compliant for municipal purposes but not provincial purposes?
- What other considerations are there?
- What if I plan to change to long-term rentals from short-term rentals?
- What about the GST/HST cost of conversion?
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As part of the federal government’s efforts to address the housing challenges in many parts of Canada, a change to deny the deduction of expenses incurred in the year on non-compliant short-term rentals went into effect in 2024.
The policy behind this change is to discourage short-term rentals of residential properties during the current housing crisis. Now that the first year of the new law is behind us and the 2025 filing season is here, we discuss which short-term rentals are affected by this rule.
A property owner may plan to move to longer-term rentals to avoid the disallowance of expenses for income tax purposes. However, this should not be undertaken without considering other risks, primarily the GST/HST cost of a conversion from operating a short-term rental property to operating a long-term rental property.
Is my rental property affected?
If you rent out a residential property for short periods of time through platforms like Airbnb or Vrbo, you may be wondering if and how the income tax denial of expenses impacts you. As a first step, you should know that a residential property includes all or any part of a house, apartment, condo unit, cottage, mobile home, trailer, houseboat, or other property that is legally permitted to be used for residential purposes.
To determine if the denial of expense deductions applies to your rental property, you need to understand the definition of a non-compliant short-term rental. This is, at any time, a residential property that is offered for rent for a period of less than 90 consecutive days that:
- is located in a province or municipality that does not permit the operation of a short-term rental; or
- is non-compliant with any of the registration, licensing, and permit requirements in the locality in which the property is located.
Based on the above definition, it is important to ensure that all municipal and provincial regulatory obligations are understood and complied with so that your property isn’t considered a non-compliant short-term rental.
Owners who lease their residential property for at least 90 days may be affected if the property is sublet by a tenant for a period of less than 90 days.
How is the amount of non-deductible expenses calculated?
Where the rule applies, a non-compliant amount is determined by taking the total of all amounts that would otherwise be deductible in computing income for the taxation year in respect of the short-term rentals during that year.
Where the short-term rental was non-compliant for part of the year, the total amount of rental expenses would be pro-rated based on the number of days of non-compliance over the number of days that the residential property was a short-term rental to determine the portion of expenses that would be non-deductible.
What is the impact on my personal income tax if the expenses are denied?
If you have a non-compliant short-term rental, the non-compliant amount would be non-deductible for income tax purposes, meaning that you would be taxed on the gross rent received for the period of non-compliance.
Let’s consider the following example: Joe owns a condo unit in Ontario as an investment property and was renting it out long term to a university student. The student graduated and didn’t renew the lease at the end of the semester.
Joe decided to rent out his condo on Airbnb starting May 1, 2025, for the rest of the year. He earned $12,000 in rent and incurred $8,000 on reasonable expenses to operate the short-term rental, resulting in $4,000 in net income from this property since May 1.
Unfortunately, since May 1, Joe failed to comply with the registration, licensing, and permit requirements of the municipality in the city where the property was located. Therefore, he was non-compliant from May 1 to Dec. 31, 2025.
Joe may be under the impression that he only needs to pay income tax on his $4,000 net income, but the new rule would apply on his non-compliant short-term rental. In this case, the non-compliant amount would be $8,000 (i.e., $8,000 in reasonable expenses multiplied by 245 non-compliant days and divided by 245 days the condo was a short-term rental). This means Joe’s taxable income would increase to $12,000 (i.e., $4,000 in profit plus $8,000 of non-deductible expenses).
Assuming the top marginal tax rate in Ontario of 53.53%, Joe would be liable for personal income tax of $6,424 on his non-compliant short-term rental for 2025, which is $4,282 higher than he anticipated.
How do I determine if the property rental is compliant?
Unfortunately, there is no single, centralized way to confirm whether a short-term rental is compliant. Instead, property owners must review the rules that apply in the municipality where the property is located. This typically involves checking whether short-term rentals are allowed and, if so, whether all applicable requirements have been met, including:
- the registration, licensing, or permit requirements;
- the minimum rental period rules; and
- how short-term is defined for local purposes.
Municipal rules may also impose additional restrictions, such as limits on who may operate a short-term rental, whether a corporation can be licensed, whether the owner must reside in the municipality, or whether only a portion of a principal residence may be rented.
In addition to municipal rules, a similar review must be carried out to determine if there are provincial restrictions or registration requirements. For example, some provinces, such as B.C., have a province-wide short-term rental registration process, and others, such as Ontario, rely only on municipal restrictions. Quebec has its own rules that govern the deductibility of expenses on short-term rentals.
What if the property is compliant for municipal purposes but not provincial purposes?
If a property is compliant for municipal purposes but not provincial purposes, or vice versa, it is the period of non-compliance under either regime that will determine which expenses are denied for income tax purposes.
For example, if a property is rented as an Airbnb for the months of September to December, and municipal registration requirements are satisfied as of Sept. 1, there may be no denial of expenses if only municipal compliance is required. However, if the property is located in a province that has province-wide registration requirements and provincial registration is not completed until Oct. 1, then about one-quarter of the total rental expenses would be denied.
What other considerations are there?
In addition to registration requirements, some municipalities and provinces charge a special short-term rental tax in addition to requiring registration. This tax could have various names, such as an accommodation or occupancy tax.
There is also another income tax risk if these rules are not identified and applied correctly. The CRA can re-assess a taxpayer who has claimed expenses that are denied under these rules, and it can re-assess at any time—even beyond the normal statute of limitations. As a result, the financial exposure can increase for each year of non-compliance that goes unaddressed.
What if I plan to change to long-term rentals from short-term rentals so that my expenses are not denied?
For income tax purposes, there is no immediate impact of starting to rent a property that was rented short term to one that is rented for longer terms (e.g., renting for terms of 90 days or more). However, there is potentially a GST impact.
What about the GST/HST cost of conversion?
For GST purposes, a property rented for short-term rentals is generally considered a commercial supply of property. When a property stops being used for short-term rentals and converts to longer-term rentals, then the Excise Tax Act will require you to self-supply GST/HST on the fair market value of the property at the time of this change. Although there may be specific rental rebates available, the GST/HST cost on conversion may be substantially higher than the income tax cost of denied expenses.
For example, on a property worth $750,000 in Ontario, you will be required to remit HST of 13% on $750,000 ($97,500) once there is a change in use. You may also be eligible for certain GST/HST rental rebates.
The information in this publication is current as of March 31, 2026.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.